February 1st, 2005

SBC reported an acquisition to buy former parent company AT&T for $16 billion, creating a telecommunications firm with vast international and domestic wireline properties, as well as a portfolio of domestic wireless businesses.

The deal, which is expected to close early next year, calls for AT&T shareholders to receive total consideration currently valued at $19.71 per share, including 0.77942 shares of SBC common stock for each AT&T common share. In addition, AT&T said it will pay its shareholders a special dividend of $1.30 per share.

"We are combining AT&T's national and global networks and expertise with SBC's strong platforms and skills in local exchange service, wireless and broadband," said Edward Whitacre Jr., chairman and chief executive officer of SBC. "It's a great combination."

SBC currently owns 60 percent of the nation's largest wireless operator Cingular Wireless L.L.C., which late last year closed on its $41 billion acquisition of AT&T's former wireless subsidiary AT&T Wireless Services Inc. SBC noted that it currently has $26 billion in net debt excluding debt at Cingular.

The deal is also expected to impact AT&T's wireless plans that were to include the launch of a mobile virtual network operator service using Sprint PCS' wireless network and the AT&T brand name the company is scheduled to receive back from Cingular later this year.

AT&T Chairman David Dorman said the company still plans to launch a wireless service this year, but noted that he would welcome the opportunity to sell products from Cingular through the venture.

Cingular currently offers MVNO-based services with 7-Eleven Inc., as well as reselling minutes through a number of outlets, including prepaid provider Tracfone Wireless Inc.

SBC Communications said it expects to yield a net present value of more than $15 billion in synergies from the acquisition, and that synergies will ramp up to a net annual run rate of $2 billion or more beginning in 2008.

SBC added that nearly half of the total net synergies would come from network operations and information technology as facilities and operations are consolidated; 25 percent from the combined business services organizations as sales and support functions are combined; and the rest spread between the elimination of duplicate corporate functions and increased revenues from migrating service offerings to new customer segments.

The deal received positive reviews from a number of analysts, who echoed SBC's synergistic cost-saving claims.

"The irony of a Baby Bell acquiring AT&T cannot be overlooked, but there is also a compelling logic at play here," noted industry research firm Ovum. "AT&T is a long-distance and international company, SBC primarily a domestic and local business. Both are profitable, but having to fight hard in their respective markets. Join the two, cut out the overlaps and drive synergies, and bigger will make better."

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A report from TNS Telecoms noted that the combined entity would control 28 percent of wireline revenues, as well as 27 percent of the local telecom market households and 37 percent of the long-distance market households.

The combined entity would also represent 15 percent of all dollars spent on telecom services compared with 16 percent from Verizon Communications Inc.

Consumer groups were not as thrilled, noting the deal will hurt consumer choice and decrease competition.

"For most consumers, the communications market is rapidly deteriorating into a duopoly dominated by two firms because of the failure of new entrants to gain a foothold in the market," said Gene Kimmelman, Consumers Union senior director of public policy and advocacy.

"Two companies are not enough to provide serious price competition or strong incentives to innovate."

Source: RCR News

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